Gordon Campbell on the politics of austerity

Gordon Campbell on the politics of
austerity

by Gordon
Campbell

Later this month, New
Zealand will be subjected to its second austerity Budget in
a row. Zero budgeting is being presented as the only path of
virtue. This is despite the fact that - elsewhere in the
real world - it has been a very bad week indeed for the
politics of austerity. Voters in France and Greece have just
delivered a strongly negative verdict, based on experience,
on the economic policies to which they have been subjected.
They’ve decided that you can’t continue to cut jobs and
slash government spending and assume this will somehow,
magically make firms and individuals willing and able to
spend more, consume more, and invest more. When you’re in
a recessionary hole, eliminating jobs and cutting back on
spending just tends to prolong and deepen the
recession.

Yet amusingly, Prime Minister John Key has
treated the election outcomes in Greece and France as an
endorsement of his government’s policies, rather than as a
rejection of them. The way he saw it, France and Greece just
didn’t want to give up the good times. As he told Newstalk
ZB earlier this week : “If you don’t take the hard calls
up front, and you allow them to accumulate, then it becomes
harder and harder and harder because people just don’t
want change….In the case of France, I think they’ve had
some real luxuries for a long period of time. Ultimately
they don’t want to let those good things go," he said.
“It’s the same thing with places like Greece. They’ve
built up massive amounts of debt. Now they’re being forced
by the IMF and others to go through an austerity package
they don’t want." No hint that voters were not exactly
clinging to the good times – but were refusing to be made
the fall guys in the bad times being visited on them by the
same bankers, politicians and elites who were responsible
for the recession in Europe, and elsewhere. The people
clinging to the good times are yesteryear’s advocates of
de-regulation, who are now the prophets of austerity for
everyone else.

New Zealand, Key claimed, was "a million
miles away from that…[And] that’s why the government’s
having a zero budget this year, it’s why we had a zero
budget last year, it’s why we’ve spent very little new
extra money in the four years we’ve been in office," Key
said. Right. In fact, austerity has been very selectively
applied in New Zealand. At the outset of those four years in
office, Key and his government embarked on a patently
unaffordable tax cutting programme that benefitted the
relatively affluent few, while – as usual - failing to
deliver the economic growth that the tax cutting ideologues
always promise, yet never deliver. Since then, we have been
subjected to a random package of asset sales, public service
job cuts, diversions (convention centres, Hobbit deals etc)
and hope that a prosperous China or Ausrtralia will float
our boats, too. Menwhile, thanks largely to the policies of
austerity – and the tax cut for GST trade-off, bound to
fail in a recession - the
tax take keeps on undershooting.

The main advantage
that the New Zealand currently possesses in the post -2008
global environment—i.e., our relatively low levels of
government debt—is one which the government inherited, and
for which it can take no credit. While the then-government
was using the mid 2000s boom to reduce government debt,
National was clamouring for it to be dished out in tax cuts.
We can only thank our lucky stars that National didn’t win
the 2005 election – because this would have almost
certainly sent us into the global recession having just
squandered our current best asset. That track record does
make National an unconvincing advocate of austerity, though.
But no matter, because time is running out for the
economics, and politics of austerity.

Consider the case of
Ireland, which has been a good soldier in this crisis,
imposing ever-harsher austerity in an attempt to win back
the favor of the bond markets. According to the prevailing
orthodoxy, this should work. In fact, the will to believe is
so strong that members of Europe’s policy elite keep
proclaiming that Irish austerity has indeed worked, that the
Irish economy has begun to recover. But it hasn’t. And
although you’d never know it from much of the press
coverage, Irish borrowing costs remain much higher than
those of Spain or Italy, let alone Germany. So what are the
alternatives?

The route of salvation, Krugman
maintains, is to restore cost-competitiveness and boost
exports, mainly via the devaluationary option that is
currently inhibited by the euro:

As a counterpoint to
Ireland’s sad story, consider the case of Iceland, which
was ground zero for the financial crisis but was able to
respond by devaluing its currency, the krona (and also had
the courage to let its banks fail and default on their
debts). Sure enough, Iceland is experiencing the recovery
Ireland was supposed to have, but hasn’t.

But
surely hasn’t austerity and thrift worked for Europe’s
big kahuna, Germany? Not really. Its dominant position was
not achieved by Teutonic thrift but via expansionary
policies, both at home and amongst its neighbours. Krugman,
again:

Talk to German opinion leaders about the euro
crisis, and they like to point out that their own economy
was in the doldrums in the early years of the last decade
but managed to recover. What they don’t like to
acknowledge is that this recovery was driven by the
emergence of a huge German trade surplus vis-à-vis other
European countries — in particular, vis-à-vis the nations
now in crisis — which were booming, and experiencing
above-normal inflation, thanks to low interest rates….So
Germany’s experience isn’t, as the Germans imagine, an
argument for unilateral austerity in Southern Europe; it’s
an argument for much more expansionary policies elsewhere,
and in particular for the European Central Bank to drop its
obsession with inflation and focus on growth. The Germans,
needless to say, don’t like this conclusion, nor does the
leadership of the central bank. They will cling to their
fantasies of prosperity through pain, and will insist that
continuing with their failed strategy is the only
responsible thing to do.

Likewise, we continue to
cling to the same failed strategies. Our government battens
down the hatches, cuts jobs, slashes spending, sells public
assets to our mates, and hopes and prays for prosperity
among our trading neighbours…while maintaining, largely
for ideological reasons, a floating exchange rate that is
removing the possibility of the devaluation that would
actually throw a lifeline to our exporters.

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